WIND LULL, WIND RISING

Wind Projects at a Standstill; Despite Washington's Enthusiasm, Recession and New Regulations Slow Firms
Jonathan Starkey, July 11, 2009 (Washington Post)
and
National lab studies building better wind turbines
Sue Major Holmes, July 11, 2009 (AP via Chicago Tribune)

SUMMARY
Looking ahead, the short-term future for wind appears mixed, both offshore and onshore.

Regulatory obstacles have been eliminated for offshore wind. Plans are rolling. But no building is going forward. Financing is evasive. The new, eased regulations require approvals that it is not yet clear how to obtain.

The “new day for energy production” predicted by Secretary of the Interior Ken Salazar when he announced the Obama administration’s Interior Department (DOI) was granting exploratory leases off the coasts of Delaware and New Jersey last month may be farther in the future than anybody had wanted.

The news had been better for onshore projects until legendary energy entrepreneur T. Boone Pickens announced last week he was postponing his 1,000-megawatt, Pampa, Texas, wind project, the biggest wind energy installation in the country.

The wind industry set growth records last year for the 4th year in a row. It added 8,600 megawatts in 2008, bringing total installed capacity to over 25,000 megawatts. Wind supplies almost 2% of U.S. power already but, much more significantly, it represented over 40% of new power generation installed in the U.S. last year.

The longer offshore development is delayed, the longer this magnificent resource goes to waste. (click to enlarge)

But wind is, it seems, a victim of its own success. In many places where there are still ample resources for expansion, there is no need for more capacity until there is new transmission to deliver it. As in offshore wind, financing for new transmission is evasive and serious regulatory obstacles remain.

With Pickens, the ultimate corporate deal maker, there is always another side to the story and, in the case of the Pampa wind project, there is a backstory about a deal for the sale of Texas Panhandle water to Dallas going sour that made the wind project less profitable. But the wind installation's postponement was due at least in part to the fact that the Panhandle turbines would not be able to deliver the electricity they generate without new transmission and Pickens cannot get financing to build new transmission. The billionaire oil & gas man also cannot finance the new transmission himself due to the drop in natural gas prices and the devastating widespread losses in financial markets that have seriously impacted his own holdings.

The good news is that there is lots of support for all the New Energies from the federal government in the form of regulatory streamlining, cash grants, loan guarantees and as much as $3 billion in direct payments in lieu of production tax credits. There could be more federal support coming.

The timeline in the U.S. is seriously lagging. (click to enlarge)

An historic energy and climate bill just passed the House of Representatives and could fight its way through the Senate. Such legislation would provide the first-ever national Renewable Electricity Standard (RES) requiring regulated U.S. utilities to obtain as much as 15% of their power from New Energy sources by 2020. It would also mandate the first-ever national cap&trade system capping U.S. greenhouse gas emissions and instituting a market through which emissions allowances would be auctioned and a platform through which allowances would be traded. The auction and the trading platform would create revenues that could finance New Energy projects such as wind (and solar and biomass) installations.

Many states also have RESs and subsidy programs in place to drive New Energy growth.

Finally, there is new wind technology coming available that could very well make wind in general and offshore wind projects in particular better investments.

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Already, according to the American Wind Energy Association (AWEA), wind power is cost-competitive with energy generated from newly built coal, natural gas and nuclear plants.

Recent research at Sandia National Laboratories’ Wind Energy Technology Department has come up with a turbine blade efficiency system that adds sensors and software on the blades and in a turbine’s nacelle, the computerized and engineered brain and operational center mounted on the top of the tower behind the rotor. The nacelle constantly monitors and adjusts the machine's operation, gearing it up and down according to wind speeds. The new system allows big turbines to produce electricity from faster and slower winds and to endure harsh weather conditions more robustly by making the information going to the nacelle more complete and making its ability to adjust the turbine's operation more precise.

Such technology breakthroughs make bigger turbines more practical and economic. Bigger turbines make investment in offshore projects, which are more expensive to install and maintain, more practical.

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COMMENTARY
Offshore wind is an uncertain investment because it is literally an investment in uncharted waters. And that investment, if it is to take U.S. offshore wind from theory to reality, must be big.

Bluewater Wind won 2 of the DOI leases for Delaware and New Jersey offshore sites. It’s power purchase agreement (PPA) with Delaware’s Delmarva Power made it a leading candidate to turn the leases into the first U.S. offshore installations – until investors Babcock & Brown, Bluewater's Australian parent company, announced the financial crisis will require a sell-off of assets. Now unable to move ahead, Bluewater is looking for new capital.

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The common factor in the Pickens problem with transmission and the offshore projects - and it is a problem that confronts big solar power plants and many other New Energy project developers as well - is that the time delays imposed by regulatory hurdles and environmental impact studies create significant impediments for investors in obtaining returns on their investments. Like the proposed Pickens transmission system, the offshore projects need to lock in funding before they can begin the approvals and impacts processes. Before making such investments, the money people need to know how long they must plan to wait for expected returns. The uncertainty of the approvals and impacts processes makes such planning difficult.

With Obama administration streamling, returns could come for investors within 2 years. With Not-In-My-BackYard (NIMBY) and Build-Absolutely-Nothing-Anywhere-Near-Anything (BANANA) opposition and state and federal regulators’ jurisdictional disputes (border wars), returns could be a very long time in coming.

Exploratory lease sites... (click to enlarge)

The $1 billion, 130-turbine Cape Wind offshore project was proposed in 2001. It was to be the first U.S. offshore installation. Due to legal challenges and a fierce fight between the developers and the locals, partially waged in the media at a cost of millions of dollars, it is still awaiting full approval.

That Cape Wind does not stand today stands as a landmark for those who would put money into building offshore wind. Many yet-to-be-built tranmission systems like Sunrise Powerlink also stand as similarly unstanding landmarks for those who would put money into building transmission.

Offhsore projects proposed for New Jersey and Rhode Island are still going forward slowly. PPAs like the one reached between Delmarva Power and Bluewater may be one way to give investors some confidence about a return on their money. Bluewater President Peter Mandelstam says that because of his PPA he is still talking with potential financers.

...but will they be financed? (click to enlarge)

Here is the time schedule Bluewater's Mandelstam is giving prospective investors: His company is proceeding with plans to install a pair of meteorological towers in the DOI lease area in the summer of 2010, at a cost of $6 million each. The data should be complete by the end of 2011. That is when there will have to be $2 billion if there is to be an installation. Construction could begin in Spring 2013, if all goes according to schedule. Towers and transmission to onshore switching stations would be complete and the project would start generating 6 months later, in Fall 2013.

In case it slipped by unnoticed, take note of the key phrase: “…if all goes according to schedule.”

There is no doubt the saving grace in all the delay is that wind power technology just keeps getting better, making it possible to harvest ever greater portions of the wind at ever better cost-benefit ratios. Sandia Lab’s Wind Energy Technology Department has been doing wind energy research since the 1980s. The recent breakthrough in blade hardware and software design was done in conjunction with Purdue University.

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The Sandia-Purdue project was a triumph of software and hardware design. Called an accelerometer system, it necessitated identifying the best sensors to put on blades and the best places to put them on the blades. The sensors monitor wind pressure and communicate with gearing systems inside the turbine’s nacelle that respond to the information with changes in the position and speed of rotors (the blade mechanisms) and the blades.

Refinements are still being made at Sandia’s wind power testing facility near Amarillo, Texas. The new technology should become widely available to wind developers by the summer of 2010. That should allow plenty of time for it to be incorporated into the turbines that go into the first U.S. offshore project, whenever and wherever that should turn out to be.

Its current lull in growth not withstanding, Sandia’s technological advance is yet another indication of how right the U.S. Department of Energy (DOE) was in its Spring 2008 finding that it is entirely feasible for the wind industry to install enough new capacity for the U.S. to get 20% of its electricity from the wind by 2030. Even the U.S. regulatory process should be able to get itself untracted, in the face of ever-worsening climate change, in 2 decades.

QUOTES
- Brian Yerger, CEO, New Energy consultant Aerca Advisors: "They're just reapproaching all of the other players out there, hat in hand…There are a lot of balls in the air."
- Matthew Kaplan, senior wind analyst, Emerging Energy Research: "I guess I would say there's a lot of uncertainty out there in the industry…"
- Ed Feo, attorney partner specializing in New Energy, Milbank, Tweed, Hadley & McLoy: "[Offshore wind] is relatively high on the difficulty scale…Five years from now, it will be a lot easier. But right now, every issue requires a lot of thought and discussion. There's just not a policy manual to pull off the shelf."
- Kaplan, Emerging Energy Research: "[The Cape Wind turmoil] in itself makes investors cringe, when they see the first offshore wind project has taken this long and is still not over the hurdles…"

It's way past time to get busy building. (click to enlarge)

- Peter Mandelstam, President, Bluewater: "I've been in business long enough to understand that sometimes companies fail…I'm not disappointed, it's simply business. One meets a new challenge, and one overcomes it. I've raised capital before, and I'm raising capital again."
- Jose Zayas, Wind Energy Technology Department manager, Sandia National Laboratories: "Wind is very random; it's very active…You get gusts, you get all kinds of phenomena. Machines need to be designed to withstand all those variabilities…It's globally recognized that wind energy is cost-effective ... and is competitive. But there's a lot of research to be done…"
- John Dunlop, senior project engineer, AWEA: "[Turbine technology is now so advanced that] any advancements we make will be incremental…On the other hand, any improvements in the productivity will be helpful and anything that can be done to reduce the stresses, anything that can be done to ensure turbines are durable and reliable, will reduce downtime and improve energy efficiency…[Producing 20% of U.S. power with wind by 2030 is] entirely feasible…[and] those incremental improvements that will continue to keep that price low."